This morning Joe Kernan said something about my prior Oil calls and the involvement of Speculators. What he said was partially true — at $75, I claimed speculation was irrelevant. However, over $100, I changed my view. At $125-150, it was obvious. Once prices went vertical, it was apparent to me that speculators, at that point, were relevant.

However, we heard the speculators were what was driving the oil market (on CNBC and elsewhere) from $40 and up. I believe those calls were wrong. That changed at much higher levels. Hence, our sell call at $125-130 dollars.

Let’s clarify the past calls in Oil.

As I wrote May 09, 2008 — “Oil Bubble?

The difficulty with the bubble moniker is determining exactly how much of the price is being driven by purely speculative factors. With Crude, a variety of forces are driving prices: A combination of both fundamentals (increasing demand, constrained supply, pipeline problems), technicals (Trend, money flow, etc.), along with the geopolitics of two Middle East wars — as well as some speculation.

Additionally, we have seen the general perception of commodities shift, where they are now seen as a more legitimate asset class for portfolio managers, along with Equities, Fixed Income, REITs, cash, etc. than it has been previously.

And this: What’s Next for Crude Oil ?

We have been Bullish on Oil and energy stocks for a long time. Our first recommendation of Crude Oil was back in 2003, when the price broke out over $32 per barrel. I picked Energy as my favorite sector for the Business Week forecasts for 2004 — something that more than a few people ridiculed at the time.

In 2004, we observed our target of Oil = $50 a Barrel was hit. I also explained why at $40-50 there was no “terror” premium (comments picked up by WSJ, Barrons, and Slate).

Early on, we recognized that it was Chinese Oil Demand underlying the increase in cost. We also looked at why Refining Capacity was a problem. We have examined Global Crude Oil Demand & Gasoline, we looked at Oil: Inflation adjusted.

We looked at whether Oil Jitters Gotten Overblown?. That answer was no. We also looked at the question: Do Higher Oil Prices Lead to Recessions? Turns out the answer is yes. Large Hedge Funds who had been ignoring our bullish energy advice did so at their own peril.

And then again on May 27, 2008: Speculators & Oil Price Spikes, Part II

My own view is that speculators have contributed to the price to some degree, but the tight supplies and freefalling dollar get more blame.

At $75, there wasn’t much speculation in the oil market. At $125, there was lots.

, ss>

Previously:
What’s Next for Crude Oil ? (May 09, 2008)

http://bigpicture.typepad.com/comments/2008/05/what-is-next-fo.html

Oil Bubble ? (May 09, 2008)

http://bigpicture.typepad.com/comments/2008/05/oil-bubble.html

The Costanza Energy Policy: 25 Ways to Drive Oil to $150 (May 29th, 2008)

http://www.ritholtz.com/blog/2008/05/the-costanza-energy-policy-25-ways-to-drive-oil-to-150/

Category: Contrary Indicators, Energy, Markets, Technical Analysis

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

19 Responses to “Clarifying CNBC Oil Comments”

  1. “Do Higher Oil Prices Lead to Recessions? Turns out the answer is yes.”

    Wait – I thought the recession started in late 2007. Oil peaked in July. I would say that the economy slowed noticeably before oil prices got out of control. I would also say that other factors contributed far more to creating the recession than high oil prices. Maybe a better way to put it is high oil prices were the symptom and not the disease.

    I have a question of my own. If oil was in a bubble (which it looks like it was) and that bubble has now burst, doesn’t that mean that oil is going to stay down for a long time? Bubbles don’t re inflate after all – they go somewhere else.

  2. dead hobo says:

    Sorry, but I distinctly remember (no, I can’t and won’t try to look up specific references) BR comments where he pondered that oil prices were a reflection of supply and demand. Oil prices were at stratospheric levels at that time. Comments to the contrary are ambiguous, such as

    “Even If I disagree with the bubble thesis, I love any report festooned with lovely charts, and this one is no different”

    To me, it still looks like a repudiation of those who thought at the time that oil prices were a tad bubbly and possible crooked, but in a legal sense. The roots of speculation were forming at $75, only the economy could support it and the rise was just creeping. The structures that allowed the immediate bubble were being built and perfected, and were awaiting the perfect storm that arrived this year.

  3. karen says:

    Speculators in the oil game may want to keep their eyes on $gaso. It’s happened before that $gaso led the move.

  4. Tom K says:

    At $42 oil looks like a bargain…but I don’t like catching falling knives.

  5. bobby9000 says:

    speculators are always relevant. anyone who understands markets knows this to be true. any trending market is led by speculating buyers/sellers. if speculators aren’t present markets bracket and are range bound.

  6. kurt westphal says:

    Barry, given the massive price de-leveraging. speculators were quite relevant. I had heard that contracts had moved into CDS/CDO space so both formal oil market and shadow CDS market operated. given the CDS problem, and its devaluation, the fact that iB’s were purchasing or leveraging oil assets, it makes sense that oil would ‘crash’ so to speak, when CDS market was discovered and failed.

    does anyone know how much was in market/and out of market and how contracts are being moved in present time? is this why oil is more ‘rational’…

  7. JohnnyVee says:

    One thing is for sure: Oil at $150 really put the squeeze on what was left of the US economy in July. It makes me wonder about whether the price of oil can substantially increase. How can oil go to back to $150 or rise to $250, as some state, when such a price is unsustainable? Anyone? Help.

  8. DoktorD says:

    Speculators will always speculate a clear trend. Oil peaked faster and higher than housing.
    People will always believe that rising asset prices equals rising wealth.
    It is all relative to point in time.
    Wealth is created by return on investment in real time.

    We are in for a generational paradigm shift.
    Things will not get back to the way it was.
    Embrace that thought and adapt.

  9. Pat G. says:

    As Jim Rogers and others have lamented for some time; there is only a finite amount of oil in the world. I expect eventually that oil will at least double from here. The major CBs of the world are all trying to re-”inflate”. Eventually, their actions will be successful and their economies will gain traction. People will be going back to work. Businesses will start making more consumer products because people will have more money in which to purcahse them. More oil will be used. About this time all the CBs actions will begin to create inflation. The USD which oil is priced in will be a weak currency. OPEC’s cuts, whatever that may be (since they love to cheat) will further restrain oil supply. This will be at a time when the U.S. economy (in the FED’s estimation) is still too vunerable to sustain a rate increase. They’ll wait, too long, to raise rates as they are prone to error. By that time, oil could be $125 a barrel. A threefold increase from its current price. Precious metals? Despite the carnage on Wall Street (stocks) and bonds too if you look at it from a yield perspective, precious metals have held up rather nicely. With the effects of the return of $125 a barrel oil, a lower dollar and the efforts of CBs “propping up” their economies around the world all coming together about the same time, all looks fairly good for precious metals.

  10. Hal says:

    short term-remember the oil inventory figures are merely models

    similarly a company keeps inventory per its computer systems–at the end of a year they actually (sometimes) take an inventiry (they do samples usually)

    Now–get the government involved with oil inventoiries and reserves.

    Any questions?

  11. DL says:

    It seems to me that people who have at least a modicum of financial sophistication ought to make some attempt to identify who these “speculators” might be, apart from the oil producers themselves.

    Certainly, those people and entities that influence the exchange rate of the dollar will have an influence on oil prices, but very few people would characterize those participants as “oil speculators”.

    It seems to me that the only real “oil speculators” out there that influence price are the oil producers themselves. It is true that a company which can store large quantities of oil could, in principle, affect the price of oil. But most such companies are producers as well, and should be primarily characterized as such.

    Leave it to the politicians to use the term “oil speculator”; a person with at least a minimal degree of financial sophistication ought to be offering at least a hypothesis as to who these “oil speculators” might be, if not the oil producers themselves.

  12. leftback says:

    I agree completely with DL about storage by the oil producers, and they are apparently doing it right now. But these are probably not leveraged speculators. It was the hedge funds that became involved in the trade in the summer.

    I would offer that when some stock, index or commodity goes parabolic (crude at $100) it is leveraged longs and when it finally goes vertical (crude at $125) it is a sure sign that there is speculation on the short side, and that the shorts are being squeezed. Once they are out of the market there are often no more buyers and the bubble pops. Some hedge funds are going out of business because they made bad bets on crude.

  13. mudpuppy says:

    Barry, what’s your view on oil from here.

  14. danm says:

    How can oil go to back to $150 or rise to $250, as some state, when such a price is unsustainable? Anyone? Help.
    —-
    If there is massive printing of money and huge inflation.

    It looks like it’s coming in Canada… Last week we were at o defict. This week 20 billion is being handed out. Government is already starting to hand out money to individuals: 2500$ cash back for home renovations, giving back each individual investor their money back for the failed commercial paper that was frozen for a year, etc.

  15. danm says:

    Here is what you get with government intervention:

    Government gives you 2000$ cash back for an efficient furnace, the furnace is 2000$ more expensive than before the grant.

    Government give you 1000$ cash back for buying and effiencet car. The car company increases the price by 1000$.

  16. DL says:

    leftback @ 4:58

    I think this is a repeat of an exchange we had a few weeks ago. But to continue…

    What do you mean by “leveraged longs”, if not the futures traders?

    I don’t think it was the futures traders per se who sent oil up to $147 last summer. That is not to say that spot oil prices would follow exactly the same price path if governments around the world were to suddenly decide to abolish futures markets. But again, I don’t think that futures traders, on their own, had the power to send oil up to $147 last summer.

    Nor do I think that futures traders themselves have the power to send crude oil down to $34, where it is now.

    I think the price of oil is, at present, being determined by a combination of (a) slack demand, (b) exchange rate of the dollar, and (c) actions by the oil producers themselves, particularly non-OPEC countries.

    ………………

    I’m just trying to understand the “ins and outs” of the oil markets myself. But I’m also trying to prod others into being much more exact than to simply refer to nebulous “oil speculators”.

  17. DL says:

    To continue with the issue of the influence (if any) of futures traders on spot oil prices, John Hussman offered the following commentary on 7/7/08

    http://www.hussmanfunds.com/wmc/wmc080707.htm

    (I still don’t think that futures traders caused the $147 price in July)

    “It’s sometimes suggested that hedge funds, commodity pools and speculators don’t actually drive up the price of oil, because they don’t actually take delivery of the physical product – instead rolling their futures contracts over indefinitely or until they close out their positions. From an equilibrium standpoint, however, this argument ignores the zero-sum nature of the futures market. Producers have an interest in selling their output forward to lock in a predictable price. Similarly, bona-fide hedgers (such as transportation and industrial companies) have an interest in buying their oil forward so they can plan without concern about future fluctuations.

    To the extent that the speculators begin to take one-sided trend-following positions, their purchase of a futures contract crowds out the purchase that a hedger would otherwise be able to make from a producer.

    It doesn’t matter that the speculator has no intent to take delivery. What matters is that if the speculators are unbalanced on one side, the producers will have satisfied their need to pledge future delivery. Moreover, because they can lock in a high price, they will be inclined to sell more for future delivery than they otherwise would. Meanwhile bona-fide hedgers will be inclined to buy less on the forward market than they otherwise would. You can see this combination of effects in the commitments data, as a tendency for commercials as a group to become net short following significant price increases in oil.
    When it comes time for the speculators to roll the contracts forward, they have to sell their existing contracts either to someone who is willing to take delivery, or to a producer who sold the oil forward and can now clear that liability without actually producing the stuff. Given relatively high spot demand and tight supply, these rolling transactions have worked fine to this point, without
    driving prices lower”.

  18. Scott F says:

    I caught that segment and didn’t know what to make of it.

    It appears that Becky likes and respects you, but Kernan seemed kinda sour on the whole blogging concept .

  19. columbia18 says:

    Barry; Sorry I missed it. What is your current call. How much lower can these prices go? Where do you see it 3-6 months from now and why. Thanks.